VW Truck Division Pays $256 Million for Big Navistar Stake

September 06, 2016 by Tiffany Hsu, @tiffkhsu

Volkswagen’s truck division is acquiring a nearly 17 percent stake in Navistar International Corp. as the German automaker seeks to gain a foothold in the North American heavy-duty truck market.

The companies will share technology, research and procurement to help them prepare for increasingly stringent greenhouse gas emissions standards both in the U.S. and globally.

Navistar, the Lisle, Ill. maker of the International brand of big rigs, said Tuesday that Volkswagen was investing $256 million. At $15.76 for each of 16.2 million newly issued shares, the price represents a 12% premium above Navistar’s Friday closing price.

“The U.S. heavy-duty market is the biggest in the world – aside from starting their own business here, this is a way for Volkswagen to get in,” said Noël Perry, principal at consulting company Transportation Economics. “They get quite a bit of knowledge of the conditions of the U.S. marketplace and what’s required. It’s an easy first step in a very difficult jump.”

The deal currently gives the Volkswagen Truck & Bus division a 16.6 percent stake in Navistar as well as the right to appoint two directors to Navistar’s board. On its end, Navistar said the cash infusion will boost its liquidity, pump up its purchasing power and expand its supply chain globally while improving prices for customers.

The companies said they plan to collaborate on technologies related to powertrains and possibly advanced driver assistance systems, connected vehicle solutions, platooning, autonomous travel, electrification and cab and chassis components.

Executives said the alliance will likely begin producing powertrain parts in 2019 but did not specify what types.

“The market’s going to determine what the mix is,” Troy Clarke, chief executive of Navistar, said in a conference call. “We fully expect the products on the horizon to be higher quality and lower cost than the products they’re replacing.”

Navistar also will be able to license products and parts from Volkswagen, which makes trucks under the Scania, MAN and Volkswagen Caminhões e Ônibus brands.

“We expect this alliance will create significant global scale, yielding considerable cost savings for both companies,” said Walter Borst, Navistar’s executive vice president and chief financial officer. “We believe working collaboratively, the two companies can optimize the capital and engineering expenditures associated with next-generation truck and bus engine development.”

Volkswagen — whose parent company Volkswagen AG reorganized its varied truck interests into the Truck & Bus operation last year — promised to hold Navistar’s shares for at least three years.

The commercial trucking industry is facing increasingly stringent emissions regulations and is ramping up efforts to innovate. Last month, the Obama administration issued new standards that would require heavy-duty tractor-trailers to reduce emissions by up to 25 percent over the next decade.

But Navistar and Volkswagen are facing other hurdles as well.

Earlier this year Volkswagen reached a $14.7-billion U.S. settlement of diesel emissions cheating scandal. The German automaker admitted rigging emissions testing on many of its diesel passenger cars sold globally, including about 500,ooo in the U.S. In the June settlement, VW agreed to spend $10 billion to buy back the diesel vehicles it sold in the U.S. and spend another $2.7 billion on emissions mitigation programs including promoting the sale of zero-emissions vehicles.

Navistar, which also makes school buses, military vehicle and diesel engines, is only now recovering from a difficult period that risked putting the company out of business. In June, Navistar reported net income of $4 million, a massive swing from last year’s second-quarter loss of $64 million and its first quarterly profit in more than three years.

Volkswagen likely went for Navistar instead of attempting to buy rival U.S. truck builder Paccar or developing its own dealer network in the U.S. because “Navistar desperately needs help,” Perry said.

“It’s not in a very strong bargaining position, so Volkswagen got in cheap,” he said. “By any measure, Navistar is the weakest player in the marketplace, and that’s why they’re available.”

The truck manufacturer lost $4.7 billion over the past four fiscal years after making the wrong bet on diesel-exhaust technology to meet new federal standards for nitrogen oxide emissions.  Its engines couldn’t provide enough power for many applications and suffered from reliability issues.

“We are improving our market share, just not as fast as we’d hoped — this should accelerate consideration of our products,” Clarke said. “With this kind of alliance and access, it gives us the opportunity to get on the balls of our feet again.”

Truck orders have been “pretty thin for everybody out there” recently, he said. The industry is working through a glut of inventory caused by a slowdown in freight demand that in July pushed orders in the heaviest Class 8 weight segment down to their lowest level in nearly six years.

“We’ve got to get through this valley, this falloff of orders, and get back to a normal order rate that reflects demand,” Clarke said.

Navistar’s stock price has tumbled in the past two years, flirting with $40 a share in September 2014 before sinking below $10 at the beginning of this year and tortuously advancing in fits and starts in recent months.

Navistar said it expects the Volkswagen partnership to add value within the first year and ultimately save $500 million over the first five years. The company said it will remain independent but added that its alliance with Volkswagen will function under the oversight of a board featuring executives from both businesses.

In the conference call, however, Volkswagen Trucks Chief Executive Andreas Renschler didn’t rule out the possibility of an eventual merger with Navistar.

“On our way to becoming a global champion all options are open,” he said.

Analysts wouldn’t be surprised at an eventual merger.

“It has long been speculated that Volkswagen would acquire Navistar because of Volkswagen’s stated desire to expand the geographic reach of its commercial vehicle offerings, Navistar’s financial issues and depressed market cap, and the reach of Navistar’s dealer network,” Michael J. Baudendistel of Stifel Transportation & Logistics Research Group wrote in a report to investors.

The deal “would give VW a potential stepping stone toward potentially making a bid in the future for the remaining outstanding shares,” Baudendistel said.

But he also raised concerns that the arrangement could put competitive pressure on Columbus, Ind. engine manufacturer Cummins Inc., which currently provides 73 percent of the engines in Navistar Class 8 trucks.

Bauendistel said he wonders whether supplying engines to the North American market might be “the largest motive of the deal from Volkswagen’s perspective,” despite the costs of transporting the machinery from outside the market.

“There is a well-established trend in the industry globally of long vertical integration,” Clarke said. “It will pace out differently per country and per participant in the market — the real point is that now those are options that are available.”

The deal to share technology and procurement is still subject to regulatory approvals. Navistar also announced that two board members would retire, either when the company completes its share issuance to Volkswagen or at its annual meeting.

The board members are James Keyes — the company’s non-executive chairman since April 2013 and board member since 2002 — and Michael Hammes — a director since 1996.

Navistar stock closed up $5.72, or 40.7 percent, at $19.79 a share on Tuesday after surging nearly 60 percent earlier in the day.

Volkswagen, Perry cautioned, is entering “a very difficult, mature field” by attempting to crack the North American heavy-duty market.

“The opportunity to come in with a substantially differentiated product is small unless they have some secret sauce over there that no one else has,” he said. “This is good for the customers, but it’s not good for the existing competitors to have more money coming into an industry that’s already over capacity.”

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